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SATIN CREDITCARE NETWORK LTD. 30/5/2016

SATIN CREDITCARE NETWORK

BUY SATIN CREDITCARE CMP: 350 Weight:7%

THESIS At Stallion Asset we normally look for companies that can 1) Grow at 25% plus for long periods of time (opportunity size) 2) Generate High ROCE 3) Smart and Ethical Management 4) Reasonable valuations

STOCK DATA Market Cap(Rs. cr) EPS(diluted) P/E P/B Promoter’s Holding 52 week high/low Shares outstanding

KEY FINANCIALS

1116 19.97 17.52 3.84 36.2% 488/88.50 3.19

(Rs. in cr where applicable)

Y/E March 2013 2014 AUM (in cr) 580 1056 NII (in cr) 15.5 40.6 Gross NPA 0.16% 0.02% Net NPA 0.14% 0.02% Debt/Equity * 4.2x 6.1x CAR 23.4% 15.3% ROE 3.8% 11.8% ROA 0.7% 1.7% NIM 8.9% 10.5% Cost to Income 81.2% 62% *(avg liabilities/avg net worth)

2015 2016 2141 3271 59.9 90.6 0.02% 0.19% 0.01% 0.09% 8.4x 9.3x 15.7% 16.8% 18.6% 22.1% 2% 2.2% 9.2% 9.9% 61.5% 61%

VALUATION: Satin is trading at 17.5 times FY 2016 earning and having an ROE of 22%. We believe that going forward the company can grow at 4050% CAGR for the next 3 years with equity dilution of 10-15%.

We believe Satin Credit care Network has the above traits. Satin has a sizeable share in the

underpenetrated markets of Northern India. The Microfinance Industry is expected to grow at 30%+ rates for next 5 years. Satin enjoys lower compliances/ regulations, capex requirements as compared to peers like Ujjivan who have just received a small bank licence. We strongly believe that growth is sustainable in this sector for long periods of time. History Microfinance Industry can be divided in 3 phases after RBI gave permission for setting up microfinance in 2000 1) Phase 1 – (2000-2010)-Initial Growth phase where MFI AUM grew at 100% CAGR to INR 163 Billion. 2) Phase 2 – (2010-2012) - Following reports of suicides by some women borrowers; the AP government passed an ordinance in Oct’10 restricting the activities of MFIs in terms of new disbursements and collections. The cause of the borrowers was supported by some political parties, which led to a mass default in AP. Microfinance companies lost 30-40% of

Investors are advised to refer through important disclosures made at the last page of the Research Report.

SATIN CREDITCARE NETWORK LTD. their outstanding portfolio in the sector due to this mass default. Most microfinance companies which

had

significant

exposure

to

AP

went

bankrupt

after

the

mass

default.

3) Phase3 – (2012-Present) – Revival after Regulation - The microfinance industry stood back on its feet with loan growth of more than 50% CAGR. The RBI announced setting up of small finance banks last year. MFIs were the favourites with the RBI, grabbing 8 of 10 small finance licenses. Why Satin Creditcare Network ?

1) Opportunity size is massive and companies can increase loan book 4-5x in the next 5 years. 2) Value Mitigation – Unorganized Money Lender to organized Microfinance companies 3) Presence and leadership position in underpenetrated Northern India 4) Diversified Product Portfolio 5) Efforts to Increase head count ensures positive business growth prospects About Microfinance Business in India It was in the year 2000, when RBI allowed banks to lend MFI’s and treat such lending as priority sector obligations. This ensured sustainable cash flows to micro finance companies as they borrow money from these banks at higher rate (11-12%) and lend it to borrowers at higher rates (24-26%). It received further impetus when banks entered into partnerships with microfinance institutions who acted as agents for disbursements and collections of microfinance loans to individuals. This made the industry a money making business with CAGR growth of +50%. North India is highly underpenetrated microfinance market which is the biggest advantage for Satin. Micro Finance is well developed in Southern parts of the country where most of the companies are located, but its reach in other locations of the country is very low. (where Satin Creditcare is a big player). Due to factors like under penetration, huge population residing in rural areas with less than 100,000 annual income, large unbanked areas, micro finance industry is expected to grow by leaps and bounds. We believe Satin Creditcare can easily grow at 40-50% inspite of competition in this sector as the whole industry size (currently 10 billion) is set to increase.


SATIN CREDITCARE NETWORK LTD. About Satin Creditcare Network Satin Creditcare Network Limited (SCNL) is one of the largest Microfinance Institutions (MFI) in Northern India, and is the 5th largest MFI in the country. Incorporated in October 1990 as a NonBanking Finance Company, SCNL started as an individual lending microfinance company. In May 2008, SCNL launched its group lending microfinance business. The business is primarily based on the joint liability group lending model to economically active women. It has presence across 16 states, 431 branches (March 2016).  

63% of its total loan portfolio outstanding is given out for Agri-allied activities followed by 29% for service and trade purposes and 8% for production. Product Portfolio – Details

STRENGHTS       

Satin Creditcare is the largest MFI in North India and 5th largest in the country with gross AUM of Rs 3271 cr. as on 31st March, 2016. In last 4 years its AUM and PAT has grown at a CAGR of 78% and 145% respectively. Higher than its peers. Probably the only MFI player in the country whose portfolio grew by 36% in FY11 when the industry was going through crisis. Presently Joint Liability group (JLP) accounts for more than 98% of the total loan portfolio as on March 2016. Current customer base has grown to 1.85 mn – grown 4x over FY13-FY16. First and second time borrowers form 80% of the gross loan portfolio and volume, hence higher ticket size additions from the current clientele can be expected. An added advantage for Satin is that unlike Ujjivan (who has got a small bank licence) the company will not have to comply with many stringent RBI rules like maintenance of reserve ratios.


SATIN CREDITCARE NETWORK LTD.

Game Changer for Micro-finance has been Joint Liability Group lending as loans are not made to an individual but liability sharing among 5 people. This ensures that the borrower pays and in case the borrower doesn’t pay, no group member will ever receive loans from any microfinance company. There is a lot of social pressure to these ladies to not default as it will spoil relations with other liability sharing members who are normally their cousins or in-laws. 95% of all microfinance loans in India are given to Women which mainly include priority lending in rural areas. REASONS TO INVEST Largest MFI in North India Going forward the loan portfolio is expected to grow in non-Andhra Pradesh states, where the micro-credit penetration is low. Satin Credit care has got strong market presence in 16 states in North and Central India where the Micro-Finance penetration is the lowest.

Reducing Geographic concentration Historically, Microfinance companies are associated with a lot of political interference and hence concentration of loan portfolio in a particular state (more than 50% from Bihar and U.P.) increases the political risks for the company. In last three years company has managed to reduce its concentration in U.P. (Largest contributor to the loan portfolio) and going forward they are also planning to add southern states in its portfolio.



Robust AUM growth (including Managed Portfolio) Satin’s AUM has compounded at 78% CAGR from INR 580cr in FY13 to INR 3271cr in FY16.

AUM 3271 2141 1056 580

2013

2014

2015

2016

Improved Asset Quality Satin has one of the best asset qualities as compared to its peers. The company’s Joint Liability model helps the company to maintain its asset quality. In Joint liability model, the company gives a loan to 4-5 people together. So if one defaults the others are liable for the said amount and the company can collect it from them. GNPA

NNPA 0.19%

0.16% 0.14% 0.09% 0.02% 0.02% 2013

2014

0.02% 0.01% 2015

2016



Operational efficiency better than its peers

Satin SKS Equitas Ujjivan

Gross Loan per branch 7.6 CR 6.4 CR 8.3 CR 8.7 CR

Opex/Average AUM 6.7% 7.1%-GLP 7.10% 7.5%

Sizable market share in some states Company is the market leader in few North Indian states.

Huge Opportunity Size The eight MFIs cumulatively accounted for about 26% of assets managed by the industry as of 201415. As they exit the industry, after metamorphosing into SFBs along with Bandhan (which converted into a universal bank and accounted for 20% of March 2015 AUM), the industry size will halve.

Strong Return Ratios 2016 2015 2014 ROE 22.1% 18.6% 11.8% 2.2% 2% ROA 1.7% Company has got better ROE as compared to its listed peer Ujjivan.

2013 3.8% 0.7%


SATIN CREDITCARE NETWORK LTD. Strong relationship with lenders Inspite of not getting a small bank licence, raising funds is not going to be difficult for the company as they have strong backup of Marquee PE investors and a very good relationship with their lenders. They have an active relationship with 73 banks and financial institutions. PE Investors of the company include SBI-FMO, MV Mauritius, Shore Cap, NMI and DMP. PEER COMPARISION Let’s compare Satin with its listed peers. Satin can grow at 40-50% on the back of raising new capital and expanding to new geographies. As compared to its peers, Satin is fairly valued promising a higher growth potential. FY2016 (in cr)

Gross AUM

Ujjivan 5389 Equitas 6125 SKS 7677 Satin 3271 *prices as on 7/6/2016

Market Cap

Net Profit

P/E

ROE (%)

4200 5851 8653 1244

177 167 303 57

24x 35x 29x 22x

18 13 25 22

Understanding the Business Microfinance is an easy business to understand. There is cost of capital and there is yield from capital, the difference between the two is my gross profit. Then I have cost to pay for people who default on their obligation and other operating cost like employee cost, rents etc. For the Last 5 years Microfinance industry has been lending at 22-24% per year and borrowing at 1113% per year. The difference of cost of borrowing and lending Income is broadly 10-13%. In the microfinance business the maximum you can give a first time lender is 15,000 and once he pays the money in 1 year then the company can increase limits to 30,000 so as the customer becomes older the operating expenses per customer decreases (it takes the same time to collect a 500 rupee note or a 1000 rupee note for the loan manager). Since 80% of total gross loan portfolio and volume comprise of first time and second time borrowers, as they will become eligible for higher ticket size loans, the loan portfolio shall increase considerably.


SATIN CREDITCARE NETWORK LTD. KEY RISKS – PLEASE READ THIS CAREFULLY Micro-finance targets the weakest section of the society and it’s really not fair for them to make ROE’s of more than 20%. When I write this one of my analyst says that’s it not fair for life saving drug companies to have 30%+ ROE’s but all these Pharma companies have it. We do understand that the world is not fair but while making assumptions, we believe that if microfinance companies start making a lot of money (25%+ ROE), that’s the day you got to be really cautious because that will definitely bring in political interference. The RBI is not in favour of excessive profit making and wants a balance of social impact and profits. This is substantiated through one of the many speeches the RBI governor made on this topic – “My sense is that you cannot, in good conscience, make a fortune at the bottom of the pyramid. Make reasonable profits, But if you start making a fortune, it does start Raising social anxiety about how the fortune is being made.”  

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Satin enjoys high lending rates than peers (24-26%) but this may not be sustainable after initial growth spurt as the industry is getting competitive with no product differentiation. Satin Credicare had also applied for a small bank licence but like SKS microfinance, they couldn’t receive the permission for the same. Management is eyeing a universal bank licence in next few years which is going to be very difficult for the company as that may involve incurring of expenses and divergence of focus from the business activities. Another major risk which we fore see, is the political risk. Since the company is in the business of priorty sector lending, huge political interference is present. This might hamper the smooth functioning of the business. In the current financial year the company is planning to the raise 5000 crores through debt and equity. Due to the nature of the business, the company will need to borrow funds in order to grow but raising equity shall dilute the share of the shareholders.

CONCLUSION Satin is trading at lower valuations than its listed peers and hence an attractive investment at 22x.The company has good credit quality and no added regulations which it would otherwise have as a small bank. It is also planning to add 2000 employees this year to take the head count to 5000 employees (i.e. rise of 67%). This shows that management is very optimistic about its future growth. Management has given a guidance of GLP to reach 5000 cr and PAT to grow at more than 70% in FY 2017.


SATIN CREDITCARE NETWORK LTD. Disclosure: Amit Jeswani & Family have no positions Analyst Disclosures: No positions Analyst Certification: The Analyst certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. Disclaimer: www.stallionasset.com (here in referred to as Stallion Asset) is the domain owned by Amit Jeswani. Mr Amit Jeswani is the sole proprietor of Stallion Asset and offers independent equity research services to retail clients on subscription basis. SEBI (Research Analyst) Regulations 2014, Registration No.INH000002582 This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Stallion Asset is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The views expressed are those of analyst and the firm may or may not subscribe to all the views expressed therein. The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. Stallion Asset or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Neither Stallion Asset, nor its employees, agents nor representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Stallion Asset or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. Stallion Asset and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. Stallion Asset has incorporated adequate disclosures in this document. This should, however, not be treated as endorsement of the views expressed in the report. Stallion Asset or its associates including its relatives/analyst do not hold beneficial ownership of more than 1% in the company covered by Analyst as of the last day of the month preceding the publication of the research report. Amit Jeswani or its associates/analyst has not received any compensation from the company/third party covered by Analyst ever. Served as an officer, director or employee of company covered by Analyst and has not been engaged in marketmaking activity of the company covered by Analyst. We submit that no material disciplinary action has been taken on Amit Jeswani/ Stallion Asset by any regulatory authority impacting Equity Research Analysis. The views expressed are based solely on information available publicly and believed to be true. Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision.
